When comparing loan offers from multiple lenders, it can be helpful to look at the Total Interest Percentage (TIP), which is the amount that you would pay in interest over the life of a loan.
Differences Between Interest Rate, APR and Total Interest Percentage
The interest rate is the annual cost of borrowing money to buy a house, but it doesnt reflect the total cost of a mortgage. The APR includes lender fees and other charges and indicates the total cost to borrow money over the term of the mortgage. The Total Interest Percentage, or TIP, doesnt take upfront fees into account, except prepaid interest, if you choose that.
The interest rate and annual percentage rate are based on a one-year period. The TIP is usually much larger since it reflects the amount of interest you would pay over the entire term of a loan.
The TIP can be found in your Loan Estimate or Closing Disclosure. The figure is calculated by adding up all scheduled interest payments and dividing by the amount borrowed to arrive at a percentage. For example, if you took out a mortgage for $200,000 and your interest payments over the life of the loan would total $100,000, the Total Interest Percentage would be 50 percent, since the sum of all the interest payments would be half of the amount borrowed.
How Important is TIP?
The TIP calculation assumes that you will keep a mortgage for the entire term and make all payments as scheduled. If youre planning to purchase a home and live there for the rest of your life, the TIP will be important. If youre comparing the terms of 30-year mortgages but you think youll probably sell your house much sooner than that, the TIP may not be as relevant to you.
Other factors could affect the total amount you would pay in interest. If you made extra payments toward the principal, you would pay off the loan sooner and pay less in interest. You might also refinance and get a lower interest rate.
If you requested a Loan Estimate for a mortgage with an adjustable rate, the TIP will be calculated based on current interest rates. The actual amount you would pay in interest and the actual TIP could vary significantly due to future rate changes.
Weigh All Factors When Comparing Loan Offers
When you request mortgage quotes, you will be given several pieces of information. If you plan to stay in a house long-term, the total amount you will pay in interest can be important to consider. If you only expect to live in a house for a relatively short amount of time, the TIP may not be as much of a factor for you. If you have any questions, talk to your real estate agent.
This article is intended for informational purposes only and should not be construed as professional advice.
Published with permission from RISMedia.